Law School: Federal complaint filed against for-profit ITT Tech

"Certainly if I were one of those companies, I would be worried."

Although a complaint filed last week by the Federal Consumer Financial Protection Bureau was aimed specifically at for-profit educator ITT Technical Institute, it may also serve as a warning shot to other for-profit education companies.

The CFPB filed a complaint against ITT — which has two campuses in the Pittsburgh area — accusing the school of predatory lending practices. In a Feb. 26 conference call with reporters, CFPB director Richard Cordray said, "Our action today is just the first step the Consumer Bureau is taking to address consumer issues in the for-profit college market."

The complaint against ITT, which will be heard by a federal court in the company's home state of Indiana, shouldn't come as much of a surprise. In late January, a consortium of 13 state attorneys general announced they were investigating four of the largest for-profit educators, including both ITT and Pittsburgh-based Education Management Corporation.

Cordray and the attorneys general involved in the press call declined to discuss any potential future filings. A spokesperson for Pennsylvania Attorney General Kathleen Kane, who is leading the EDMC investigation, said that because the probe is an "ongoing matter, we have no comment."

"Certainly if I were one of those [for-profit education] companies, I would be worried" another shoe might drop, says Henry Levin, a Columbia University professor of economics and education who has studied for-profit education.

"What's interesting to me is that the feds have come in and found a different route of investigation," he adds. While earlier investigations have focused solely on whether educators lured students with inflated salary and job prospects, "[I]n this lawsuit, they seem to be going after how schools comply with the 90/10 rule."

Under that rule, for-profit educators can use federal loans to pay for no more than 90 percent of a student's education. The other 10 percent must come from other sources.

The CFPB alleges that at ITT, the source was often ITT itself.

Cordray said that to cover costs in a student's first year, the educator offered no-interest loans, which it called "temporary credit," that came due at the end of the year. "We believe ITT knew ... many students would not be able to repay their temporary credit balances" — or the money needed for the second year of tuition, Cordray alleged. Instead, ITT "pushed them into high-cost private loans."

In its lawsuit, the CFPB alleges that while the loan programs were "ostensibly run by third parties," they were "in reality controlled by ITT and backed by an ITT guarantee that protected those third parties from loss."

Some of the loans, Cordray charged, came with interest rates as high as 16 percent — which he likened to "financing your college education on your credit card." But ITT financial-aid staff would "rush students through an automated application process without affording them a fair opportunity to understand the loan obligations involved."

In response, ITT issued a statement saying "ITT Tech did not make any money, in interest or fees, from those third-party [financing] programs, which were designed to help students during the recent economic downturn. ... ITT Tech believes the complaint is without merit."

ITT also challenged the jurisdiction of Cordray's agency, a fledgling federal agency created to protect consumers from predatory financial practices. ITT's statement asserted that the suit addresses "issues that are unrelated to consumer finance, and attempts to cast a negative light on ... activities that are extensively regulated by other government agencies."

Kevin Kinser, chair of the Institute for Global Education Policy Studies at the State University of New York at Albany, says he's not surprised that the CFPB targeted ITT Tech. It is, he says, "one of the first to develop this internal loan model for students to finance their education."

"The business model of ITT, and other for-profit educators, is to maintain enrollment levels," he says. "If that didn't happen then stock prices declined. ... Unfortunately, students were the ones caught in the middle."